Regulation puts spotlight on €1.3bn Amprion deal

Commerz Real said it had been left 'surprised' after the German regulator said it was planning to limit returns on investments in the electricity sector by 100bps. The announcement comes just a day after Commerz led a team of institutional investors to buy a majority stake in Amprion, Germany’s fourth-largest grid.

Commerz Real admitted its surprise today at German gas and electricity watchdog Bundesnetzagentur’s plan to cut equity returns allowed from investments in the sectors.

Commerz Real, which is part of Commerz Bank and manages a range of property funds, led a consortium of pensions and life insurers in buying a 74.9 percent stake in Germany’s fourth largest electricity network, Amprion, for an enterprise value of €1.3 billion.  Commerz Real announced conclusion of the deal – its debut investment in the infrastructure space – on Tuesday, billing the transaction “unprecedented in Germany in terms of its form and scope”.

However, Wednesday, the regulator revealed it was launching consultation on a plan to limit returns on equity to 8.2 percent before taxes from the current 9.29 percent. The changes, if carried forward, would take effect in 2013 for the gas sector and in 2014 for electricity networks once results of consultation with grid operators are known. Talks will begin on October 5 and a final decision could be known by the end of the year.

The pronouncement has put Commerz Real under the spotlight given that any regulatory ruling would affect Amprion, and therefore impact on likely future returns that could be made from the company. 

A spokesman for Commerz Real told Infrastructure Investor: “This came as a surprise to all involved. We are still making up our minds on what this means and have no further statement at this time.” 

The Amprion deal was inked in July and has only now received the necessary regulatory approvals. German utility RWE was the seller, divesting the stake for an enterprise value of €1.3 billion (as at January 1, 2011), which represents almost the entire regulated asset base of Amprion as recognised by the German regulator. The sale price is equivalent to around eight times Amprion’s recurrent earnings before interest, taxes, depreciation and amortisation.

Munich Re, ERGO, MEAG, Swisslife and Talanx as well as the Westfalen-Lippe doctors’ pension fund were members of the buying consortium. Commerz Real is the party that will manage the asset. Speaking of the deal earlier this week, a spokesman said: “You can view this as a single-project, closed-end infrastructure fund, through which a couple of investors bought shares in this asset.”

Commerz Real, which holds an indirect stake in Amprion of 13 percent through the consortium, said earlier this week that it was planning to offload its stake to other investors “in the short term”. It remains to be seen how the German regulator’s announcement will affect the sale. 

Germany’s regulatory climate has often been criticised by infrastructure investors for its lack of clarity. In March 2010, at the time Belgium utility Elia, together with Australian investor Industry Funds Management, announced it was buying Vattenfall’s German grid for €800 million, infrastructure investors were grumbling on the sidelines about how the German regulator’s high capex requirements, combined with regulatory uncertainty, had limited the funds infrastructure investors could raise in the market for the deal.

Vincent Gilles, head of European utility equity research at Credit Suisse, wrote in a note that Germany’s allowed rate of return, “post all taxes […] is probably close to 5.5 percent i.e. below the cost of capital of most large utilities in Europe, which in turn explains why RWE and E.ON have been sellers of their respective high voltage (power) grids.”